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DRAWING BREAK-EVEN CHARTS Part 8

Lesson Objective To be able to draw a break-even chart. To be able to interpret a Break-even chart.

Break-even Charts We know how to calculate the break-even point, but you can also draw it on a chart! This involves drawing 3 lines:  The fixed coats line  The total costs line  The total revenue (sales) line Read through the sheet you have been given. Highlight 3 questions you have!

What does the Revenue Graph look like? Total Costs/ Revenue £ Quantity Total Revenue

What does the Breakeven chart look like? Total Costs/ Revenue £ Quantity Total Revenue Total Costs Breakeven Point

Total Costs/ Revenue £ Quantity Total Revenue What does the Breakeven chart look like? Total Costs Loss Profit Breakeven Point 50 Units 100 Units 150 Units

Margin of Safety This is the difference between the break-even point and the current level of output. If we produce 100 cakes the margin of safety would be: Production – Breakeven = Margin of safety 100 – 25 = 75 margin of safety is how much output or sales level can fall before a business reaches its breakeven point.

Total Costs/ Revenue £ Quantity Total Revenue The Margin of Safety? Total Costs Loss Profit Breakeven Point 50 Units 100 Units 150 Units Margin of Safety 100 – 150 = 50

Plotting a Break-even graph STEPS TO FIND OUT THE BREAK-EVEN USING A GRAPH 1. Calculate the companies costs using a simple table 2. Draw the graph 3. Plot fixed costs & Add variable costs to fixed costs to get total costs. Plot it on the graph. 4. Next plot revenue 5. The break-even point is where revenue line crosses the total costs line. Break-even graphs show costs and revenue plotted against output Output goes on the horizontal axis (starting from 0) Costs and revenue both go on the vertical axis

Task - Evans Cricket Bats Ltd  Fixed costs = £40,000  Variable costs £20 per cricket bat  Total costs = Fixed + variable costs  Sales revenue = Selling price x output  Cricket bats sold for £35 each Output (No of cricket bats) Fixed costs Variable costs Total costsSales revenue 1,000£40,000 2,000£40,000 3,000£100,000 4,000£140,000

Stage 1: calculating costs & revenue  Fixed costs = £40,000  Variable costs £20 per cricket bat  Total costs = Fixed + variable costs  Sales revenue = Selling price x output  Cricket bats sold for £35 each Output (No of cricket bats) Fixed costs Variable costs Total costsSales revenue 1,000£40,000£20,000£60,000£35,000 2,000£40,000 £80,000£70,000 3,000£40,000£60,000£100,000£105,000 4,000£40,000£80,000£120,000£140,000

Stage 2: DRAW the graph Turn your paper so it is LANDSCAPE and copy this. Costs (£) Output (No of cricket bats) To be able to draw a break-even chart.

Stage 3: Showing costs on a graph. Insert fixed costs. Costs (£) Output (No of cricket bats) To be able to draw a break-even chart.

Stage 3: Showing costs on a graph. Calculate total costs. Costs (£) Output (No of cricket bats) Total costs Variable costs Fixed costs To be able to draw a break-even chart.

Stage 4: Showing revenue on a graph Now add revenue to your graph. Costs (£) Output (No of cricket bats) Total costs Variable costs Fixed costs To be able to draw a break-even chart.

Stage 4: Showing revenue on a graph Now add revenue to your graph.... Costs and sales revenue (£) Output (No of cricket bats) Sales revenue Total costs Variable costs Fixed costs To be able to draw a break-even chart.

Stage 5: revealing the break-even point Break-even is point is where revenue line crosses the total costs line. Costs and sales revenue (£) Output (No of cricket bats) Sales revenue Total costs Variable costs Fixed costs To be able to draw a break-even chart.

Break-even limitations  It assumes that the firm can sell any quantity of the product at the current price. In practice the firm may need to reduce prices to sell at high levels of output.  It assumes fixed costs never change - but as output increases the firm may need to buy more machines, get bigger premises, take on extra sales and administration staff.  It assumes that all products are sold. This doesn’t always happen; some products may only be sold at lower prices or need to be thrown away.

And to finish… On the work sheet, complete the questions… margin of safety is how much output or sales level can fall before a business reaches its breakeven point. To be able to interpret a break- even chart.